How Neoliberal Reforms Lose Their Partisan Identity: Flat Tax Diffusion in Eastern Europe and Post-Soviet Eurasia

Abstract

In the post-communist world, the flat tax was a popular neoliberal fiscal reform that initially spread through dense networks of rightwing politicians and parties. Over time, its symbolism and appeal broadened, making this specific fiscal approach attractive to a wider range of actors and regimes. By considering the full set of post-communist flat tax cases and the competitive dynamics in the region, this article examines the evolution of this reform and demonstrates how the structure and the symbolism of the flat tax offered advantages to governments that eventually transcended regime type and partisanship.

Acknowledgment

The author would like to thank all of the participants at the ‘2014 Workshop on Tax and Welfare States beyond the OECD’ at the University of Bremen (2014) for their input, with special thanks to Laura Seelkopf, Hanna Lierse and Carina Schmitt.

Notes

¹ On the IMF’s revenue concerns associated with Kyrgyzstan’s flat tax, see Åslund (2007a, p. 119). See a cable raising the IMF’s concerns about the revenue consequences for the Romanian case, Wikileaks, available at: https://www.wikileaks.org/plusd/cables/05BUCHAREST130_a.html, accessed 12 January 2015. The IMF’s concerns about government revenues following tax reform in Estonia, including the flat tax, are referenced in Staff Reports of the Article IV Missions for 1994 (IMF 1994, p. 11) and 1995 (IMF 1995, pp. 3, 9).

² Despite the breadth of adoption in Eastern Europe and Eurasia, there are very few countries outside the region with a single personal income tax rate. Prior to its adoption in the Baltic countries, just a few small states in the modern world taxed the rich and the poor at the same rate, namely Hong Kong, Guernsey, Bolivia and Jamaica. Jamaica and Bolivia have had a flat tax since 1986 and Hong Kong since 1947. On the cases outside the former communist world, see Alm and Wallace (2004), Ivanova et al. (2005), Keen et al. (2006), Mitchell (2007).

³ The exclusion of these cases is mainly due to the scope of these studies. Beblavý (2014) focused exclusively on new EU member states; other studies, for example Appel (2011) and Baturo and Gray (2009), examined early trends in adoption, thereby missing later adoptions, especially in authoritarian and semi-authoritarian countries.

⁴ Based on a logit model for 20 countries in Eastern Europe and the former Soviet Union, Baturo and Gray (2009) include an imitation variable with a three-year lag to demonstrate the importance of policymakers learning from the outcomes of other flat tax programmes.

⁵ See also, ‘The Estonian Economic Miracle’, Heritage Foundation, 7 August 2007, available at: http://www.heritage.org/Research/Reports/2007/08/The-Estonian-Economic-Miracle, accessed 23 May 2014.

⁶ Author’s email interview with former Estonian Prime Minister Mart Laar, 21 April 2014.

⁷ See also, ‘Former Communist Estonia, Georgia Leading in Economic Success’, CNSNews, 8 October 2007, available at: http://www.estemb.org/est/press/eesti_meedia/aid-614, accessed 16 March 2018.

⁸ Author’s interview with Martin Bruncko, economic adviser to Finance Minister Ivan Mikloš, Bratislava, 17 May 2007.

⁹ Author’s interview with Ivan Mikloš, Finance Ministry, Bratislava, 17 May 2007.

¹⁰ On the meeting of Topolánek, Dzurinda and Orbán, see Dolejší and Šídlo (2005).

¹¹ These meetings and connections were certainly not limited to Central Europe. Russian technocrats met with their counterparts in Georgia and Ukraine at crucial stages of policy design, offering advice about strategies and revenue expectations (‘Georgia to Use Russian Experience in Tax Liberalization’, RIA Novosti, 28 May 2004; ‘Ukraine’s Deputy Premier Interviewed on Tax Reform’, BBC, 7 April 2003).

¹² Author’s interview with Ludovít Ódor, National Bank of Slovakia, Bratislava, 16 May 2007.

¹³ Author’s interview with Richard Sulík, special adviser to the Ministry of Finance, Bratislava, 17 May 2007.

¹⁴ Author’s interview with Petr Mach, Czech political adviser, Prague, 18 May 2007.

¹⁵ For example, the World Bank recognised Slovakia’s Ivan Mikloš as the top business reformer of the year in 2004 and Mart Laar was awarded the Milton Friedman Prize from the Cato Institute, among several others prizes in Europe and the United States. Likewise, the Bulgaria government under Sergei Stanishev was recognised and celebrated by the World Bank for its fiscal reforms. ‘Bulgaria: Tax Policy Brought Bulgaria to Global Top 10 Reforming Governments 2008’, US Fed News, 5 June 2008.

¹⁶ See the description of Mart Laar, ‘Mart Laar: Winner of the 2006 Milton Friedman Prize’, CATO Institute, available at: https://www.cato.org/friedman-prize/mart-laar, accessed 11 April 2018. This article quotes top officials at the CATO Institute and the Heritage Foundation exuberantly praising Laar and quotes many newspapers lauding Laar as ‘the pioneer of Europe’s flat tax revolution’ (Brussels Journal) and as the ‘father of the flat tax’ (Daily Telegraph), among other accolades.

¹⁷ Author’s email interview with former Estonian Prime Minister Mart Laar, 21 April 2014.

¹⁸ For specific remarks by the President, see ‘Press Conference by President Bush and Russian Federation President Putin’, georgwbush-whitehouse.gov, 16 June 2001, available at: https://georgewbush-whitehouse.archives.gov/news/releases/2001/06/20010618.html, accessed 20 January 2017.

¹⁹ At the time of Bulgaria’s flat tax adoption, Prime Minister Sergei Stanishev of the Bulgarian Socialist Party (Bulgarska sotsialisticheska partiya—BSP) held office. President Georgi Parvanov, the Bulgarian president at the time of the adoption, was a former member of the same party, but left the party upon assuming the presidency as required by law.

²⁰ Author’s interview with Edward Rakhimkulov, director of the Ukrainian Parliamentary Development Project, Kyiv, 23 July 2009.

²¹ Author’s interview with Edward Rakhimkulov, director of the Ukrainian Parliamentary Development Project, Kyiv, 23 July 2009.

²² ‘Ruling Party Congress Floats Flat-Tax Proposal for Bulgaria’, IHS Global Insight, 18 June 2007; ‘Bulgarian Socialists to Discuss Flat Tax’, Sofia News Agency, 15 June 2007; ‘Bulgaria Set to Continue along Economic Growth Path’, Deutsche Presse-Agentur, 22 June 2005.

²³ ‘Bulgaria Country Report’, The Economist Intelligence Unit, July 2007; ‘Bulgaria’s Socialists Form Minority Government’, Agence France Presse, 24 July 2005.

²⁴ ‘Bulgarian Unions Agree on Compensation Payments, Flat Tax for 2008’, IHS Global Insight, 11 December 2007. Author’s interview with Gyorgy Ganev, researcher, Institute for Liberal Studies, Sofia, 12 August 2007.

²⁵ ‘Bulgaria: Minimum Wage to be Raised by 22.2% in 2008’, Esmerk Bulgarian News, 16 May 2008; ‘Bulgaria: Flat Tax is Introduced’, Dnevnik, 16 May 2008.

²⁶ Author’s interview with Kristina Karagyozova, chief expert, National Bank of Bulgaria, Sofia, 15 August 2007. ‘Bulgaria: Tax Policy Brought Bulgaria to Global Top 10 Reforming Governments. 2008’, US Fed News, 5 June 2008.

²⁷ Author’s interview with Gyorgy Ganev, researcher, Institute for Liberal Studies, Sofia, 12 August 2007. ‘Bulgaria: Tax Policy Brought Bulgaria to Global Top 10 Reforming Governments. 2008’, US Fed News, 5 June 2008.

²⁸ ‘Montenegro’, US Department of State Country Profile, available at: https://2009-2017.state.gov/outofdate/bgn/montenegro/106351.htm, accessed 15 March 2008.

²⁹ ‘Bulgarian Parliament Approves New Prime Minister’, New York Times, 30 May 2013.

³⁰ ‘Bulgaria to Introduce 10% Flat Tax to Lure Investors’, SeeNews, 29 July 2007.

³¹ ‘IMF Representative Approves Romania’s Introduction of Flat Tax Rate’, BBC Monitoring European, 4 January 2005, p. 1.

³² ‘Prime Minister Hints at Flat Tax for Belarus’, IHS Global Insight, 2 June 2008; ‘Tax Advice from Skopje’, Wall Street Journal, 16 November 2006. For further details on Macedonia, see US Department of State Investment Climate Report 2015, available at: https://www.state.gov/e/eb/rls/othr/ics/2015/241642.htm, accessed 15 March 2018.

³³ ‘Flat Tax: Economic Panacea or Pandora’, Euractive.com, 29 January 2010. See also, Dolejší and Šídlo (2005).

³⁴ Interview with Gyorgy Angelov, Bulgarian senior analyst, Institute for a Market Economy, Sofia, 13 August 2007.

Additional information

Notes on contributors

Hilary Appel

Hilary Appel, Podlich Family Professor of Government and George R. Roberts Fellow, Claremont McKenna College, 850 Columbia Avenue, Claremont, CA 91711, USA. Email: [email protected]